Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Travelzoo Uncaged

The popular travel sale specialist continues to grow in the shadows.

You know that you're a forgotten growth stock when you miss your top- and bottom-line targets yet your stock climbs on the news. That's what online travel-deal publisher Travelzoo(NASDAQ:TZOO) realized this morning, with earnings growing from $0.11 to $0.13 a share in the third quarter despite analysts perched at the $0.15 mark.

Then again, the company did take a margin-munching hit on its new U.K. business that could pay off nicely in the long run. However, even on a revenue basis, Travelzoo grew its top line by 41% when analysts were banking on a 44% improvement.

So why did the stock open 5% higher at $21.67 this morning? Relief, mostly. Anyone familiar with Travelzoo knows that it had more gyrations than a belly dancer on rock candy last year. The stock's wild trading journey took it from single to triple digits last year before it made its sharp descent into reality over the course of 2005.

These days, one can still argue whether the stock is overvalued, but the assumptions aren't as outlandish as they were when the stock was at last year's lofty heights. Having earned $0.44 a share over the past four quarters -- and blessed with $2.40 a share in cash -- the stock is trading at an enterprise value that is 44 times trailing earnings at the moment. That certainly doesn't seem cheap, but the company continues to grow briskly thanks to the popularity of its Top 20 list of ad-supported travel deals, which is sent out to more than 9 million opt-in mailing list subscribers.

Yes, the barrier to entry seems low here. If you've got spare change burning a hole in your pocket, you, too, can start a similar business with 9.1 million fewer subscribers, but it's a niche that Travelzoo seems to have cornered.

Conventional travel sites like Sabre Holdings' (NYSE:TSG) Travelocity, Expedia(NYSE:EXPE), and Motley Fool Inside Value pick Cendant's (NYSE:CD) Orbitz are more likely to acquire Travelzoo than they are to produce a competitive, dilutive product. Even the edgy Motley Fool Stock Advisor pick Priceline(NASDAQ:PCLN) has morphed into a more traditional portal these days.

Travelzoo bears watching at this point. No, it doesn't mean that the company is going to be one of the two brand-new stock recommendations in the next issue of the Motley Fool Rule Breakers premium newsletter service. That comes out this Wednesday, by the way, in case you're curious. However, it does mean that Travelzoo's growth may be worth tracking now. If its new venture overseas goes well, sales acceleration could result, forcing even the most jaded of investors to wonder if Travelzoo is overvalued at all.

Longtime Fool contributor Rick Munarriz enjoys traveling when he can. He does not own shares in any company mentioned in this story.The Fool has an ironclad disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Author

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time with more than 20,000 bylines over those 22 years. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he splits his time living in Miami, Florida and Celebration, Florida.
Follow @market